For years, I’ve been hearing complaints from traders about one party or another supposedly causing price spikes in the wholesale market, but no trader wants to come forward and put their name to the allegations. The reason is simple: they don’t want to get shut out of the market. Besides, proving that a particular spike is the result of actual manipulation is difficult, and the Electric Reliability Council of Texas, which is supposed to police such things, has shown little interest in stopping bad price signals.
Griddy, however, is a California electricity retailer that’s new to the opacity of the Texas market. It inadvertently pulled back the curtain on this shadowy corner of electricity deregulation, when it noticed that wholesale prices on May 30 spiked to $9,000 a megawatt hour — the maximum allowed by ERCOT — for no apparent reason. Griddy, as the Houston Chronicle’s L.M. Sixel wrote recently, then did something no one has done in the past 20 years: it calculated the price of the spike.
Griddy determined the cost was about $3 per customer, but said it also expected ERCOT to reprice the obvious error. ERCOT, however, doesn’t do that. Since most consumers buy electricity through long-term contracts, the effects of these spikes are muted, and the grid operator says that repricing improper trades would cause market instability.
It’s not often you hear a market cop argue that inaccurate pricing makes markets more stable, but that’s essentially what ERCOT is saying. No doubt, Jordan Belfort, the self-ordained “Wolf of Wall Street” is kicking himself for not making that argument to the Securities and Exchange Commission back in the day.
Markets, of course, function most efficiently when the pricing is most accurate. But the wholesale electricity market has been an open frontier of anything-goes pricing for years. Griddy’s revelation caused ERCOT board members to ask for more information, and a subsequent study revealed 55 similar incidents in a four-month period this spring, Sixel wrote.
(Calpine, a generator, admitted it was behind the May 30 error, which it blamed on a low-level IT employee, Sixel reported.)
ERCOT later admitted to the Public Utility Commission that these sorts of mistakes happen as much as once a day. In other words, the problem is a lot bigger than one errant IT guy. It appears that at any given moment, wholesale electricity prices are likely to be as much fiction as fact.
The market corrects, of course, but that’s not the point. Nor is the issue whether consumers are directly affected isn’t the issue, because deregulation in Texas was never about benefiting consumers. Griddy’s findings became the basis for a complaint filed with the PUC by the trading firm Aspire Commodities, which noted that the pricing irregularity in May resulted in $18 million being transferred to generators who sold power at the inflated prices.
And if, as ERCOT admits, this sort of thing goes on daily, then the entire wholesale market is operating more like a casino, with generators profiting from “mistakes” of inaccurate pricing.
The next study the ERCOT board should commission is whether these daily price manipulations are pushing up average prices over the long term, because if so, then consumers are paying more than they should for electricity in this alleged free market no matter how much they shop around among retailers.
Griddy’s revelation shows that after 20 years of trying to create transparent markets for electricity, Texans are still left in the dark.